Monday, February 28, 2011

Yet Another Health Care Merger
The third largest health care REIT, Health Care REIT, Inc, agreed to acquire privately owned Genesis HeatlhCare, a leading provider of senior care and senior rehabilitative centers for $2.4 billion.  Because Genesis is private, no FFO multiple data was provided.  Health Care REIT states that the transaction will accretive to its earnings.
Big Health Care Merger
I just saw on that senior care and medical property owner Ventas, Inc. is purchasing Nationwide Health Properties, Inc. for $5.4 billion.   The combined company will, apparently, be the largest health care REIT in the United States.  I am trying to get more information on the valuation.   Both companies have medical office properties and hospitals, but it appears that the biggest component is senior housing and skilled nursing.

Update:  I was told by an industry insider that he was hearing that the deal was priced at 17 to 18 times NHP's FFO, which must be this year's anticipated FFO.  NHP had FFO of $2.14 per share in in 2010, based on its results released yesterday.  The trailing multiple was 21 times 2010's FFO, which dropped to 19.5 times using NHP's $2.30 of AFFO.
More Environmental News
Here is an article from yesterday's New York Times to cheer you up on a Monday.  The article goes in depth on waste water generated in natural gas drilling. 

Friday, February 25, 2011

Sure it’s got to go up. But how much?
Here is an interesting item on health care costs from a website called The Incidental Economist.  Below is a graph from the post above:

The disconnect on health care spending in the US is startling.

Friday, February 18, 2011

Please Explain This To Me
The hotel market is confusing.  In San Diego, the 670-room Hotel Del Coronado just sold for $880,000 per room.  Across the San Diego Bay, another luxury hotel, the 1,625-room Manchester Hyatt, just announced that it is under contract for $351,000 per room.  I understand that more rooms may result in a lower price per room, but for two luxury hotels in the same town, the price dichotomy seems large.  I don't know for sure, but I doubt a night's stay at the Hotel Del costs more than twice much as a night at the Manchester Hyatt.
Inland Western and Borders
I did a quick cross reference between the Borders stores in the Inland Western portfolio and the list of planned Borders closures.  I count only five of the eleven Borders in the Inland Western portfolio that are closing.  Stores closing stinks, but with the size of the Inland Western portfolio - 312 properties and nearly $6 billion of investment in properties - the closure of five stores seems small.  The Inland Western website is excellent for searching out properties and tenants.

I will post on Inland Western's planned stock listing in the next few days.

Thursday, February 17, 2011

Strong Correlation
I am not an economist, but I read plenty of economic articles.  It doesn't take an economist to connect the strong relationship between housing and the unemployment rate. When the housing market was booming unemployment dipped below 5%.  When the housing market tanked unemployment rose.  Now the housing market and the employment market are both stagnant.  I believe that unemployment will stay high until the housing market rebounds, which means a significant increase in new home sales and housing starts.  (Note that the housing figures released yesterday showed a 14% increase in housing starts in January over December, but all the growth was in multifamily units, and single family starts actually declined 1%, and are at their lowest level in two years.)  I recently read two articles that tie my theory together.

Here is an article on the "new normal" unemployment rate, which one economist estimates is 6.7%.  I don't doubt this number, as all the jobs related to housing bubble, such as in construction, real estate sales, design, and finance (how many people do you know who are former mortgage brokers or real estate agents?) will not rebound to the levels seen during the boom.  I think that the housing boom was responsible for dropping the unemployment rates down from 6% to under 5%. 

Here is a second article from yesterday's Wall Street Journal (no subscription required) on how banks now require more equity for homeowners.  Here are a few paragraphs and a graph from the article:
The median down payment in nine major U.S. cities rose to 22% last year on properties purchased through conventional mortgages, according to an analysis for The Wall Street Journal by real-estate portal That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.
The move to force home buyers to lay out more cash is driven mostly by banks, who have found that larger down payments discourage delinquencies by increasing the buyers' exposure to loss and reducing the impact of declining prices. Many home buyers placed little, if anything, down during the boom.
Keeping otherwise qualified and willing borrowers on the sidelines makes no sense to me.  I am not advocating going back to the crazy mortgages of the mid-2000s, but the swing of the pendulum, 22% down payment and strict credit guidelines, has gone too far.  Easing credit in a sensible manner will help the housing market.  It will help eliminate excess supply, and hopefully start a sustained increase in home values.  Existing homeowners (and banks!) will benefit from increased values.

Real estate has always been finance driven, the more money available, the more people will buy homes.  The demand for homes is there, banks just have to meet it.  Homeowners need equity in a home, or they will treat the home like a rental, which is what happened during the housing bubble. Having a financial stake in home is vital, but current draconian terms are going to prolong the housing mess.  Lending policies that make home ownership easier should drop unemployment.  Without a prudent easing of home lending credit terms the housing market will stay in its current bog and unemployment won't drop to its "new natural" level.

Monday, February 14, 2011

More Bluerock
I have a few comments on my previous post on Bluerock Multifamily Trust.   I noted that it was uncommon for a REITs single purpose entity to enter into its own working capital line of credit.  But the more I thought about it, I can see the logic of having the single purpose entity's line of credit.  The property has four owners, and it was probably unlikely that one of the four owners was going to commit financially without committing the other three, unless it received additional ownership or protections, which probably would not have been forthcoming.  In this scenario,  the line of credit at the special purpose entity level makes sense.

It is important to note that the working capital loan, because it is at the property ownership entity level and not at the REIT level, is an off-balance sheet transaction for the REIT, and the REIT's share of the obligation needs to be added when determining the REIT's debt level.

Bluerock Multifamily's restated September 30, 2010 10-Q lists all four of its property investments as investments in unconsolidated entities, which is how you should account for joint venture investments.   Unconsolidated investments are shown on the REIT's balance sheet as a net figure, and don't reflect any debt of the joint venture.  Again, this is the proper method to account for joint ventures, which is how the REIT invested in all four of its properties.  Investors now need to dig through the financial statements' notes to find property-level data.  The four Bluerock Multifamily  investments have an aggregate leverage of 78%, and none of that debt is on the REIT's balance sheet.  The debt on Bluerock Multifamily's balance sheet, which is 74% of its unconsolidated investments, is its borrowings from affiliates that the REIT used to make its equity investments.  This debt is separate from the REIT's property specific debt.  I getting light headed with debt this high.

Sunday, February 13, 2011

Bluerock Multifamily Reopens and Raises Another Eyebrow
I wrote late last year about Bluerock Multifamily Trust.   It had to suspend the sale of its shares in November until it restated its past financial statements and filed them in a post-effective amendment with the SEC.  In mid-January, the REIT re-filed is past financial statements and the SEC declared the REIT effective again on January 31, 2011.

On January 26th, Bluerock Multifamily filed an 8-K, which is a filing that a public entity has to make when it has a material event, which disclosed that one of the entities through which it owns its properites had entered into a $500,000 line of credit agreement with an affiliate of Bluerock Multifamily.  Text from the 8-K is below:
On January 20, 2011, BEMT Meadowmont, LLC, a wholly owned subsidiary of our operating partnership (“BEMT Meadowmont”) entered into an agreement with Bluerock Special Opportunity + Income Fund II, an affiliate of our sponsor (“SOIF II”) for a line of credit represented by a promissory note (the "Note").  Under the terms of the Note, BEMT Meadowmont may borrow, from time to time, up to $500,000, for general working capital.  The Note has a six-month term from the date of the first advance and matures on July 20, 2011.  It bears interest compounding monthly at a rate of 30-day LIBOR + 5.00%, subject to a minimum rate of 7.00%, annualized.  Interest on the loan will be paid on a current basis from cash flow distributed to us from BR Meadowmont JV Member, LLC (the “Meadowmont JV Member"). The Note may be prepaid in whole or in part at any time or from time to time without penalty. The Note is secured by a pledge of our indirect membership interest in the Meadowmont Property and a pledge of our direct membership interest in the Meadowmont JV Member.

I can't think of another instance where a separate single-purpose entity obtained its own working capital line of credit away from the parent entity.  Not that it's wrong, it is just not that common.  Working capital needs of single purpose entities are typically paid from property revenue.  Is the property not generating sufficient revenue to sustain itself?  You can't tell from the filing.   It is common for real estate funds to own their investments indirectly through separate entities. These are typically single-purpose entities that own nothing but the underlying property.

The line of credit poses several issues that bear watching.  The affiliated entity that made the loan to the property is a private fund that is paying an 8% distribution.  (It also has an equity investment in the property.)   The same entity made a loan to Bluerock Multifamily at a 7% interest rate so the REIT could acquire the property, and now it made a working capital loan at a 7% interest rate.  If the entity keeps making loans at 7%, and has offering and operating fees to overcome, how can it pay 8% to its investors over the long term?  Bluerock Multifamily is paying a 7% distribution.  It has borrowed money to fund its equity investments in its properties, and now a property in which it invested is borrowing money for working capital, both of which would take away money from distributions.   I will be looking at this REIT's ability to pay its distribution when it releases its 10-K in a month or so.

Here is some additional information on Bluerock Multifamily's ownership in the property that obtained the working capital loan:

Bluerock Multifamily owns the apartment complex with two affiliates and a third party and one of the affiliates loaned money to the REIT to allow the REIT to make its equity investment in the property.  If it sounds complicated, it is.  Here is the ownership description from the REIT's re-stated 10-Q:

We invested $1.52 million to acquire a 32.5% equity interest in BR Meadowmont Managing Member, LLC (the “Meadowmont Managing Member JV Entity”) through a wholly owned subsidiary of our operating partnership, BEMT Meadowmont, LLC (“BEMT Meadowmont”).  BEMT Co-Investor invested $1.17 million to acquire a 25% interest and BEMT Co-Investor II invested $1.98 million to acquire the remaining 42.5% interest in the Meadowmont Managing Member JV Entity.  BEMT Meadowmont, BEMT Co-Investor and BEMT Co-Investor II are co-managers of the Meadowmont Managing Member JV Entity.  Under the terms of the operating agreement for the Meadowmont Managing Member JV Entity, certain major decisions regarding the investments of the Meadowmont Managing Member JV Entity require the unanimous approval of the Company (through BEMT Meadowmont), BEMT Co-Investor and BEMT Co-Investor II.  If the Company, BEMT Co-Investor and BEMT Co-Investor II are not able to agree on a major decision or at any time after April 9, 2013, any party may initiate a buy-sell proceeding.  Additionally, any time after April 9, 2013, any party may initiate a proceeding to force the sale of the Meadowmont Managing Member JV Entity’s interest in the Meadowmont JV Entity (defined below) to a third party, or, in the instance of the non-initiating parties’ rejection of a sale, cause the non-initiating parties to purchase the initiating party’s interest in the Meadowmont Managing Member JV Entity.

The Meadowmont Managing Member JV Entity contributed $4.65 million of equity capital to acquire a 50% equity interest in Bell BR Meadowmont JV, LLC (the “Meadowmont JV Entity”).  A Bell Partners Inc. affiliate that is unaffiliated with the Company, Fund III Meadowmont Apartments, LLC (“Bell”), invested $4.65 to acquire the remaining 50% interest in the Meadowmont JV Entity.  The Meadowmont Managing Member JV Entity and Bell are co-managers of the Meadowmont JV Entity. The Meadowmont JV Entity is the sole owner of Bell BR Meadowmont, LLC, a special-purpose entity that holds title to the Meadowmont Property (“BR Meadowmont”).  Under the terms of the operating agreement of the Meadowmont JV Entity, decisions with respect to the joint venture or the Meadowmont Property are made by unanimous approval of the managers.  Further, to the extent that the Meadowmont Managing Member JV Entity and Bell are not able to agree on certain major decisions, either party may initiate a buy-sell proceeding.  Additionally, any time after April 9, 2013, either party may initiate a proceeding to force the sale of the Meadowmont Property to a third party, or, in the instance of the non-initiating party’s rejection of a sale, cause the non-initiating party to purchase the initiating party’s interest in the Meadowmont JV Entity.

As a result of the structure described above, the Company holds a 16.25% indirect equity interest, BEMT Co-Investor holds a 12.5% indirect equity interest and BEMT Co-Investor II holds a 21.25% indirect equity interest in the Meadowmont Property (50% in the aggregate), and Bell holds the remaining 50% indirect equity interest.  The Company, BEMT Co-Investor, BEMT Co-Investor II and Bell will each receive current distributions from the operating cash flow generated by the Meadowmont Property in proportion to these respective percentage equity interests.
If you find this Byzantine ownership structure confusing, so do I.  The addition of a working capital loan just added to Bluerock Multifamily's complexity.

Friday, February 11, 2011

Texas v. California
As a Californian, I found this opinion piece by Michael Hiltzik in the Los Angeles Times interesting.  Texas has similar debt problems to those in California.  Here are a few quotes, but the entire article is worth reading:

The budget crises afflicting states coast to coast arise from a combination of the nationwide recession and obsolete or wrongheaded state taxing schemes. The National Council of State Legislatures says that at least 15 states face large deficits this year and 35 in fiscal 2012. 

As things stand now, the council's figures place California's projected 2012 deficit at $19.2 billion, or 18.7% of its general fund, and the Texas deficit at $7.4 billion, or 17% of its budget. States with broad-based tax policies that balance property, income and sales taxes are best equipped to ride out economic cycles, because those levies don't all move in lockstep with the economy. Neither California, with its over-reliance on income and sales taxes, nor Texas, which has no income tax, qualifies.
Here is another quote from the article:

The supposed superiority of Texas over California in fiscal policy long has been a conservative article of faith. In 2009 the libertarian American Legislative Exchange Council published a report co-authored by the conservative economist Arthur Laffer underscoring the contrast. The report posited that "Texas' superior policies over the past several years are making the Lone Star State more resilient to the current economic downturn."

But Texas was hardly immune to the recession. From 2006 through 2010, the unemployment rate in Texas soared from 4.4% to 8.3%. Yes, that's a better showing than California, which went from 4.9% to 12.5%, but the difference may reflect the huge effect on California's economy of the popping of the housing bubble, which jumped our unemployment rate to a new magnitude and is likely to keep it there for a while.
And finally this:
Curiously, Texas' reputation as a low-tax, business-friendly state survives although its state and local business levies exceed California's as a percentage of each state's business activity (4.9% versus 4.7% in 2009, according to a report by the accounting firm Ernst & Young). What's different is that Texas business taxation relies more on property, sales and excise taxes and government fees than California, which relies on taxing corporate income.
I got a kick out of talk of Texas secession.   With this kind of deficit and such limited government, good luck with forming a new country.

Tuesday, February 08, 2011

Google News is my new toy (yes, I know I am late to the party, and the party has probably moved to Twitter).  I just saw this Reuters' article summarizing an interview with Vornado CEO Michael Fascitelli.  This line in the article jumped out to me:
Since hitting lows in mid-2009, U.S. commercial property prices are up 33 percent but still off 18 percent from their peak in 2007, according to the Green Street Advisors Commercial Property Price Index.
That is quite a recovery, and if it's correct should take the sting off those nagging legacy property concerns.  I don't, unfortunately, believe the claim, although I'd like too.  It may be true for certain top-end properties in specific major markets, but I would bet that aggregate commercial real estate have not recovered 33% from their 2009 low.

Update:  The above information runs counter to Moody's data that shows property values still 42% below the 2007 peak.  Obviously, someone's numbers are wrong.

Thursday, February 03, 2011

Non-Traded REIT Article
I am not sure what to make of this article in Registered Rep magazine.  It is worth a read, at a minimum to see perspective from a financial advisor's point of view.  I found some of the comparisons between non-traded REITs and traded REITs weak.  One proponent of non-traded REITs says that non-traded REITs buying properties now don't have the legacy property issues that plague some traded REITs.  True on the surface, but the counter point is that traded REITs, since they're continually priced, have already been discounted by the market for their legacy assets.  Another weak point is this:
The illiquidity of public non-listed REITs actually drives what makes them popular with many investors — that they are valued based on appraisals of their underlying properties, and can't be sold on an exchange for instant liquidity, Goldberg says. Because their returns are not correlated to publicly traded securities, they can be attractive for diversifying an investor's portfolio.
“I think in large part that's what's fueled the interest,” Goldberg says.  (Mark Goldberg is managing director at WP Carey & Co.,  a sponsor of non-traded REITs.)
I didn't know illiquidity was so popular.  I guess this popularity was why so many non-traded REITs stopped or restricted redemption requests during the credit crisis.  The only reason there is no correlation between non-traded REITs and traded REITs is because non-traded REITs are priced at their offer price, which does not change until eighteen months after non-traded REITs end their capital raising.  Over time, the underlying assets of traded REITs and non-traded REITs should correlate.

Another point is non-traded REITs' yields.  Advisors and investors like the high yields offered by non-traded REITs.  I would caution that not all yields are not equal.  Many non-traded REITs have higher initial yields than the non-traded REIT can generate or support over time.  These high initial yields are to attract capital, and are hopefully based on realistic assumptions for returns the REITs can generate.   Non-traded REIT sponsors have to acquire assets that can support the non-traded REIT's yield.  A non-traded REIT (or any REIT) that continually overpays its distribution will eventually have to drop its distribution.  It's uncanny how the drop in yield seems to correspond with the end of a non-traded REIT's capital raising period.

One huge point not addressed in the article is compensation to financial advisors, which can be a gross commission of up to 7%.  I wonder whether financial advisors would still be enamored with non-traded REITs if their commissions were a half or third of the current rate?  I don't expect a rush sponsors trying to find out.
Channeling Peter Gabriel
As events unfold in Egypt and turn bloody, I am reminded of the lyrics in Peter Gabriel's song Biko:

You can blow out a candle
But you can't blow out a fire
Once the flames begin to catch
The wind will only blow it higher

And the eyes of the world are 
Watching now
Watching now

Wednesday, February 02, 2011

CMBS Delinquencies Hit Record High
CMBS have hit a record delinquency rate of 9.1%, as defined by sixty or more days late with payments.  The apartment sector was the hardest hit, with a delinquency rate of 15.8%.  Here is an article with all the depressing news.  I did not read much positive news in the article, except that it restated that CMBS issuance is supposed to increase to nearly $40 million in 2011, which we noted last week.

Tuesday, February 01, 2011

Fracking-A Bubba
Here is a New York Times article on the fracking process for natural gas extraction.  This article details how some drillers used diesel fuel as part of the "cocktail" that is shot into wells to loosen natural gas:
The diesel fuel was used by drillers as part of a contentious process known as hydraulic fracturing, or fracking, which involves the high-pressure injection of a mixture of water, sand and chemical additives — including diesel fuel — into rock formations deep underground. The process, which has opened up vast new deposits of natural gas to drilling, creates and props open fissures in the rock to ease the release of oil and gas.

But concerns have been growing over the potential for fracking chemicals — particularly those found in diesel fuel — to contaminate underground sources of drinking water.
Here is more information:
Two years later, when Congress amended the Safe Water Drinking Act to exclude regulation of hydraulic fracturing, it made an express exception that allowed regulation of diesel fuel used in fracking.
The Congressional investigators sent letters to 14 companies requesting details on the type and volume of fracking chemicals they used. Although many companies said they had eliminated or were cutting back on use of diesel, 12 companies reported having used 32.2 million gallons of diesel fuel, or fluids containing diesel fuel, in their fracking processes from 2005 to 2009.
The diesel-laced fluids were used in a total of 19 states. Approximately half the total volume was deployed in Texas, but at least a million gallons of diesel-containing fluids were also used in Oklahoma (3.3 million gallons); North Dakota (3.1 million); Louisiana (2.9 million); Wyoming (2.9 million); and Colorado (1.3 million).
Where this leaves the companies in relation to federal law is unclear. 
This "fracking" issue is going to be big as allegations of contaminated groundwater grow.
Seizure and Bankruptcy
Here is the latest on the former CNL hotels.  The Bloomberg article is hard to follow, but it looks like junior lenders, led by hedge fund Paulson & Co., completed the foreclosure on the hotels, which Morgan Stanley had acquired in early 2007, and once getting control promptly put five of the the resort properites into bankruptcy.   This is the junior lender's (now owners) strategy to renegotiate and change the terms on the senior underlying debt.  The bankrupt properties included Hawaii's Grand Wailea and PGA West in La Quinta, California.  Paulson & Co., and the other lenders/owners will continue to manage the hotels through the bankruptcy process.
AMB Property Corp Acquires Prologis
AMB Property Corp acquired agreed to acquire ProLogis yesterday.  The deal valued ProLogis near its Friday close of approximately $15.00 per share price.  Based on one estimate of ProLogis' 2011 Fund From Operations, it appears the sales price is at 23 times Prologis' expected 2011 FFO.  This seems like a high multiple given ProLogis debt, but is lower than AMB's 33 AFFO (trailing) multiple.  Some of the executives that formed Dividend Capital, a sponsor of non-traded REITs, have backgrounds at ProLogis.  AMB and ProLogis are the two largest industrial REITs, and combined would be a $14 billion company.  The new company will keep the ProLogis name and symbol (PLD). 

The non-traded REIT sponsors are going to love FFO multiples over twenty and be delirious with a an FFO multiple above thirty.   The impact of the front end costs will be a wiped away with FFO multiples this high.  Better yet, non-traded REITs are now an arbitrage play!  Seriously, the valuations should be kept in the nine to twelve range for Adjusted Fund from Operations for back of the envelope valuation estimates.